23 October 2013

Vienna 2 Initiative draws attention to weak credit growth

The reduction of cross-border funding by Western banks for CESEE is continuing at a moderate pace, but with major country differences. A shift to a model relying more on domestic funding is well under way. Meanwhile, credit growth remains slow as a result of supply and demand factors. In view of shallow local capital markets, domestic deposit growth may well prove insufficient to support a meaningful revival of credit growth. In addition, the more selective approach of cross-border banks to the region may pose challenges for some countries—an issue that requires close monitoring. 

Addressing high NPLs is urgent

The Full Forum stressed the urgent need to tackle persistently high NPLs in several countries in the region—thereby also improving frameworks for new lending. For credit to recover, a concerted effort by regulators and banks may be needed to provide the needed incentives and momentum to break the cycle of low growth and high NPLs. The Forum welcomed the publication of the new harmonized definitions of NPLs and regulatory forbearance by the European Banking Authority (EBA). Furthermore, the Forum encouraged their wider use throughout the CESEE region. A new working group will deliver proposals by spring 2014.

Impact of the Banking Union on CESEE

The Vienna 2 Initiative noted that a Single Supervisory Mechanism as well as a Single Resolution Mechanism for the European banking union would have profound implications for CESEE. It holds the promise of more effective and better coordinated cross-border bank resolution. The Forum called for strong incentives for opt-ins to ensure as inclusive a membership as possible. It will also be important to develop an effective interface with host countries outside the banking union, including those not being EU members.

Focus on SEE

As a region which is significantly affected by these trends but still remains mostly outside the reach of the EU’s supervisory coordination mechanisms, South Eastern Europe has been designated as a special focus area for Vienna 2.

Regarding the Banking Union, while most countries are aspiring EU members, accession processes will take some time. Meanwhile the evolving European Banking Union plans do not include opt-in clauses for these countries or any special coordination arrangements. The Forum welcomed the decision of the EBA to re-engage with non-EU countries with regards to supervisory confidentiality assessments. The Forum called for a special regional arrangement for non-EU members on the path toward EU membership on the one hand and the Single Supervisory Mechanism and the EBA on the other.

New Deleveraging and Credit Monitor

The Vienna Initiative will continue to monitor deleveraging and credit trends very closely, which could be affected by the forthcoming asset quality reviews, harmonization of the NPL definition, stress tests of Eurozone banks and the prospective scaling-back of unconventional monetary policy. The Deleveraging Monitor will place added emphasis on credit developments and be renamed Deleveraging and Credit Monitor (DCM). The next DCM will be released on Thursday, 31 October, on which date a conference call will be held.

Full press release

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